Case P60

Judges: HP Stevens Ch
JR Harrowell M

BR Pape M

Court:
No. 1 Board of Review

Judgment date: 23 July 1982.

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B.R. Pape (Member)

In this reference the taxpayer alleges that wages of $11,348 derived by him from sources outside Australia during the year ended 30 June 1978 is exempt income pursuant to sec. 23(q) of the Act or alternatively pursuant to sec. 23(r) of the Act.

2. By occupation, the taxpayer is a tug boat master. The taxpayer has spent most of his working life working out of ports in his State of birth. He had established a home in a seaside town, where he lived with his wife and family. Due to the unavailability of suitable work in Australian waters the taxpayer entered into a contract of employment in or about May 1976 with a company which appears to have been a resident of X. A pro forma copy of the employment contract bearing the date of 26 May 1976 was tendered as evidence by the taxpayer of the terms and conditions under which he was employed. This was the only document he signed in connection with his contract of employment.

3. This pro forma agreement provided for the following special conditions which the employee was required to warrant that he would observe:

``SPECIAL CONDITIONS

Employee's Warranty:

The Employee warrants that he is fully qualified to carry out the duties of... and that he is free from any physical disabilities which will or could adversely affect his performance of his duties or impede or prohibit his entry into (Z).

• (a) The Employee, and when accompanied by his family, the Employee's family, whilst in (Z) shall completely comply with all laws, Acts, regulations laid down by the Government of (Z). In addition neither the Employee nor his family whilst in (Z) shall take part in any political activity in (Z).
• (b) Any breach of the matters referred to in subcl. (a) hereof shall be termed a misdemeanour and the Employee will be instantly dismissed.''

Exhibit 2 which was tendered in evidence by the Commissioner was a copy of letter dated 23 July 1976 and sent by the taxpayer's former employer to a person who accompanied the taxpayer to Z. This letter enclosed a document setting out the terms and conditions of employment which were stated to be similar to those which the addressee of the letter would be required to sign in Z if he accepted the offer of employment. The sixth paragraph of the letter referred to the following matters:

``Several specific matters have not been included in the document and these are as follows:

1. You should not be of Jewish religion.

2. The government of (Z) prohibits the use of alcohol and drugs, pornographic photos and literature, firearms and weapons and any breach of their laws would mean instant dismissal from employment and possibly a gaol sentence in (Z) followed by deportation.

3. Communications received from the dredging company which chartered the... has indicated that personal income tax, to be paid locally, will be in the order of 5% of gross earnings.

4. The Agreement you will be asked to sign is based on conditions applying to dredge employees employed from Europe. From time to time modifications will be made to the Agreement to keep it in tune with those conditions applying to people from Europe. However, these will be additional benefits and you will receive

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ATC 293

remuneration and work under conditions of employment, not less than the terms, etc., appearing in the attached Agreement.''

(Emphasis added.)

4. The vessels in which the taxpayer was engaged as the master operated in the waters off B in Z. They were involved in dredging operations which work was being carried out be a joint venture between two Dutch companies. It appears that the taxpayer's employer provided services to this joint venture.

5. He left Australia on 6 August 1976 in accordance with the obligations under this contract of employment and ceased working in Z on 3 December 1977. He spent some three days en route to B in C, whilst his employer obtained a visa for him to enter Z. His duties were to be the master of a hydrographic survey vessel.

6. His wages were paid from X and it appears that in this country such income derived by a non-resident attracted income tax at the rate of 5%. He paid no income tax in Z, and he told the Board that he believed that Z did not impose such a tax.

7. The taxpayer's accommodation whilst he was in Z was provided by his employer. Until 1 May 1977 the taxpayer was entitled to one day's leave for every three days worked and thereafter it appears he was entitled to one day's leave for every two days worked. Thus some 25% of the time to 1 May 1977 and 30% of the time thereafter he spent away from Z. The majority of these leave periods were of one month duration and it appears that all leave periods were spent in Australia with his family.

8. He was entitled to be paid his wage each fortnight. If the company did not receive any directions as to how it was to be paid, it was accumulated to the taxpayer's credit. Sometimes he directed that his wage or part thereof be remitted to an account conducted jointly by his wife and himself with a bank in the town where his home was in Australia. However in most instances he brought funds home with him when he took leave at the end of each three month period of work.

9. In my opinion there is no evidence which could justify a finding that the taxpayer was a non-resident of Australia during the year of income. I would therefore eject the taxpayer's submission that the income was exempt income by virtue of sec. 23(r) of the Act.

10. Therefore in my view the issue falls to be determined upon the application of sec. 23(q) of the Act, which provides insofar as is relevant that:

``23. The following income shall be exempt from income tax: -

• ... income... derived by a resident from sources out of Australia... where that income is not exempt from income tax in the country where it is derived...
• Provided that this paragraph shall not apply to exempt any income unless -
  • (i) where there is a liability for payment of income tax in the country where that income is derived - the Commissioner is satisfied that the tax has been paid or will be paid...''

In my view the problem which is required to be solved is to determine the location of the source from which the taxpayer derived wages of $11,348. The taxpayer submits that this income was derived from X, whereas the Commissioner contends that it was derived from Z. If it is found that the source of the income was X, sec. 23(q) would apply to exempt it from income tax due to the taxpayer having paid X income tax in respect of this income. However if it is found that the source of the income was in Z sec. 23(q) would have no application as the evidence shows that the taxpayer was under no liability for income tax in that country.

11. The submissions of the Commissioner's representative were to the effect that the evidence showed that Z was the source of the taxpayer's wages for these reasons:

• (i) he performed his work in this country;
• (ii) his contract of employment required him to observe ``special conditions'': see para. 3 (supra) ;
• (iii) at no time did he visit X whilst he was so employed.

12. On the other hand the taxpayer submitted that X was the source of the taxpayer's income for these reasons:

• (i) his wages were paid from the company's office in X;
• (ii) the contract provided for substantial leave periods away from Z (see para. 7 of Exhibit B).

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  ATC 294

13. A further possibility, and I refer to it for the sake of completeness, is that the source of the income was Australia, because the proper law of the contract appears to be the law of New South Wales - ``This Agreement shall in all respects be read and construed according to the Law of New South Wales''. It would appear that -

• (a) the law of New South Wales, being the proper law of the contract of employment, governed the rights and obligations between the taxpayer and his employer (the lex causae );
• (b) the law of the Australian State in which the taxpayer was a resident governed whether he had validly accepted the offer of employment (the lex loci contractus ). However it has also been held that the putative proper law of the contract can be involved to determine whether an offer has been accepted and in consequence whether a contract exists at all: see
  White Cliffs Opal Mines Ltd. v. Miller (1904) 4 S.R. (N.S.W.) 504 ;
• (c) the law of Z governed the mode of performance of the contract of employment (the lex loci solutionis );
• (d) X, being the country in which the employer appears to have been resident, in the absence of it also being a resident of Z, was the situs of the debt for wages: see Re Helbert Wagg & Co. (1956) Ch. 323, in which the Court held that a debt owed by a German company and payable in London could only be situated in Germany in the absence of any residence of the debtor in England.

14. The following passage from the judgment of Stephen J. in
Esquire Nominees Ltd. v. F.C. of T. 73 ATC 4114 at p. 4125 refers to the approach to be adopted in determining the source of income:

``As Evatt J. observed in
F.C. of T. v. W. Angliss & Co. Pty. Ltd. (1931) 46 C.L.R. 417 at p. 441 , taxation by reference to source of income has long been a feature of fiscal legislation in Australia, income being depicted as a flowing stream fed from identifiable sources. To use `source' in such a context is not to employ any legal concept but rather a metaphorical expression - per Rich J. in
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p. 537 - and in the task of applying this metaphor so as to determine fiscal consequences it has become accepted doctrine that the ascertainment of the actual source of a given income `is a practical, hard matter of fact', the source being `something which a practical man would regard as a real source of income' - per Isaacs J. in
Nathan v. F.C. of T. (1918) 25 C.L.R. 183 at p. 189 .

As Kitto J. said in
F.C. of T. v. French (1957) 98 C.L.R. 398 at p. 417 the Act

• `assumes that it is possible to identify, with respect to every amount of income, some activity, event or thing which may properly, though metaphorically, be described as the source from which that income has been derived'.

...

The process of identification of the locality of a source of income may differ depending upon the nature of the income in question. Where income may be seen to be derived solely from the acts of the taxpayer the source is to be found where those acts are performed; but the problem is seldom set in such simple terms, such personal exertion income will often be seen to be derived from the performance of work pursuant to some contract and the place of performance, the place of payment and to locus of the contract may all affect the question of source - French's case per Taylor J. at p. 422.''

15. Taylor J. in arriving at his decision in F.C. of T. v. French (1957-58) 98 C.L.R. 398 at pp. 421-422 referred to with approval the observations made by Jordon C.J. in
C. of T. (N.S.W.) v. Cam & Sons Ltd. (1936) 36 S.R. (N.S.W.) 544 .

```Where income is derived from wages or salary, again the source has several factors. Personal exertion may be involved in negotiating and obtaining the contract of employment, in performing the stipulated services, and in obtaining payment for them. In the present instance, for example, in the case of all the men concerned, in a very real sense it may be said that the source of their wages consisted of the three elements of getting the job, doing it, and getting paid for it. Which of these factors is the most important element of the source in any

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ATC 295

given case depends upon the facts of that case'... In that case the learned Chief Justice of the Supreme Court saw nothing special in the circumstances of the employment under consideration and treated the place where the employees' services were rendered as determining the territorial source of the wages paid in respect of those services.''

Here the locus of the contract of service is in my view Australia and not X as was submitted by the taxpayer (albeit that any judgment which might be obtained may only have been capable of being enforced in that country). The only nexus with X is that where the taxpayer's employer carried out its payroll administration. Whilst the situs of the debt appears to have been in X, the work which gave rise to its creation was done in Z.

16. In
F.C. of T. v. Mitchum (1965) 113 C.L.R. 401 Barwick C.J. said at p. 407:

``The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of `source' to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that the question be resolved in any particular sense.''

At p. 408 he said:

``... It is sufficient for present purposes to say that neither French's case (supra) nor any other of which I am aware lays it down that for the purposes of the Act the source of wages salary or remuneration for services performed is necessarily, in default of special circumstances, in the place where the work is done or the services performed.''

Of the three elements referred to by Jordon C.J. in Cam's case (supra), namely getting the job, doing it and getting paid for it, I would in this reference give little weight to where the taxpayer was entitled to be paid. In my opinion where the work was done by the taxpayer is to be found the source of his income.

17. Notwithstanding this conclusion I attach significant weight to the fact that the taxpayer pursuant to the contract spent some 25% to 30% of his time away from Z on leave. As the locus of the contract was Australia part of this income could properly in my opinion be characterised as having a source in Australia. However in view of the conclusions I have reached, nothing turns on whether part of the income was derived from an Australian source. I therefore find as a matter of fact that the taxpayer was a resident of Australia and that he derived income of $11,348 from Z and that such income was exempt from income tax in that country.

18. I would uphold the Commissioner's decision and confirm the 1978 assessment of income tax.

Claim disallowed